LIN HSIEN TSENG v. SO SIN MUI, BONNIE

FOR REFERENCE

DCCJ8790/2001

Dishonoured cheque - Parol Evidence Rule - Payment of price of goods by cheque - s. 21 of Bills of Exchange Ordinance, Cap. 19.

The Plaintiff obtained from a Master summary judgment against the Defendant on a dishonoured cheque for $500,000. The Defendant's Defence avers that there is an underlying oral agreement whereby the cheque was delivered in escrow on condition that the Plaintiff would supply documentation and particulars pertaining to goods to be sold by the Plaintiff to the Defendant. Since the Plaintiff had not fulfilled the condition, the cheque was not a bill of exchange. On that basis, the Defendant appealed against the Master's decision. There are two distinct lines of authorities in England and Hong Kong for opposite effects on this point.

Held: (1) A cheque is not a contract. At best, it is evidence of certain terms of a contract. Where there is an underlying oral agreement between the parties supported by a cheque as evidence of certain terms of the contract, it is open to a defendant to introduce extraneous matters pertaining to the underlying contract by way of defence. The Parol Evidence Rule does not assist Plaintiff suing on a dishonoured cheque per se because the Rule only applies to bar introduction of evidence that contradicts the terms of a contract wholly in writing; (2) Section 21 of the Bills of Exchange Ordinance, Cap. 19, clearly envisages and permits introduction of evidence to prove conditional delivery of a cheque as between the immediate parties to a cheque; (3) A cheque as a bill of exchange is an unconditional demand by the drawer to a bank, it is not an unconditional promise to pay by the drawer to the party taking delivery of the cheque from the drawer. A cheque as an undebitable instrument of payment inures only to a holder in due course; (4) in the premises, the appeal is allowed, summary judgment set aside with unconditional leave to defend.

DCCJ8790/2001

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 8790 OF 2001

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Judgment

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1. This is an appeal against the decision of Acting Registrar S. Kwang given on 17th September 2001 whereby final judgment was entered for the Plaintiff against the Defendant for the sum of HK$500,000.00 together with interest thereon at the rate of 10.86% per annum from 23rd May 2001 until the date of 17th September 2001 and thereafter at the judgment rate until payment. After hearing the appeal, for full reasons that would be handed down in due course, I set aside the judgment. Here are my reasons.

2. The Plaintiff's claim is for the sum of HK$500,000.00 being the amount of a dishonoured cheque no. 111573 ("the cheque") dated 30th April 2000 drawn by the Defendant on Hang Seng Bank Limited in favour of the Plaintiff. The cheque was allegedly for purported payment of Chinese herbal products sold and delivered to the Defendant. It is common ground that the Defendant gave instructions to the bank to stop payment of the cheque.

3. In the Defence filed on 4th July 2001, the Defendant alleged that she had an oral joint venture agreement ("the Joint-Venture") with the Plaintiff in marketing the Chinese herbal medicine. In her affirmation, the Defendant said that the cheque was issued 'subject to the fulfillment of terms and conditions of the oral joint venture agreement'. The Defendant also alleged that as the Plaintiff failed to supply a Certificate of Analysis of the medicine and to supply details such as the batch number, manufacture date and expiry date of the products, the Plaintiff had breached the terms and conditions of the Joint-Venture. The Defendant admitted that she has possession of the Chinese herbal products delivered by the Plaintiff to her.

The Principles

4. According to Mr. Chan, counsel for the Plaintiff, under sections 3 and 73(1) of the Bills of Exchange Ordinance, Cap. 19 a cheque is an unconditional order in writing requiring the bank to pay on demand, or at a fixed determinable future, a sum certain in money to a specified person. The parties herein are business people engaged in a commercial venture and it is reasonable to assume that they knew the nature of a cheque. The cheque was clearly intended to be used as real instrument of payment. See Prosperity Lamps & Components Ltd v Rotegear Corp Ltd. [2002] 2 HKC 638. A cheque is treated in the ordinary course of commerce and in the practice of the courts as if it were cash. See China Merchants Container Lines Ltd v Ng Kwok Kit (t/a LAPWIN INDUSTRIAL CO) unrep., HCA No 4652 of 1991, (26 September 1991, Godfrey J). It is well established that a claim for unliquidated damages under a contract for sale is no defence to a claim under a bill of exchange nor is it available as a set-off or counterclaim. The bill is itself a contract separate from the contract of sale. See ASA ENGINEERING CO LTD v SUPER LINK CO LTD, unrep., Civ App No 33 of 1991, 24 April 1991, CA (Fuad V-P, Penlington JA and Liu J). Applying the general rule that extrinsic evidence such as evidence of an oral agreement contradicting a term of contemporaneous written agreement is inadmissible, the allegation that the payment for the said cheque was subject to the fulfillment of terms and conditions of the alleged Joint-Venture is unacceptable. See Man Sun Finance (International) Corporation Ltd v Wong Kwan Man [1982] HKLR 146.

5. I must confess that the Defendant's arguments were not entirely clear to me. A cursory reading of the skeleton submission prepared by Miss Hui of counsel, for the Defendant, would reveal what the difficulties I was faced with. Doing the best I could, I surmised that the Defendant relied on (1) no consideration for the cheque and (2) conditional delivery of the cheque.

6. Miss Hui submitted that the goods were delivered to the Defendant without any concluded sale and purchase agreement. A sale and purchase agreement would be concluded only after the Plaintiff had supplied to the Defendant documentation and particulars to enable the Defendant to obtain requisite government authority or licence to sell the goods as Chinese herbal medicine. See sections 109, 112 and 114 of the Chinese Medicine Ordinance, Cap. 549. Since the Plaintiff had not provided the requisite documentation and particulars, the transaction between the Plaintiff and Defendant was not concluded and the cheque was therefore not supported by any consideration.

7. As to conditional delivery, it was contended on behalf of the Defendant that conditional delivery of a cheque is a good defence to a claim on dishonoured cheque. See Section 21 (2)(b) of the Bills of Exchange Ordinance, Cap. 19. In the present case, the delivery of the cheque sued upon was subject to the conditions agreed between the parties that the Plaintiff was to supply the requisite documentation and particulars pertaining to the goods as Chinese verbal medicine. Parol evidence, therefore, ought to be allowed to prove the agreement that the cheque was delivered in escrow subject to conditions and that those conditions have not been fulfilled.

8. It is important to note at this stage that the cause of action relied upon by the Plaintiff is simply dishonoured cheque. The Plaintiff has not amended his Statement of Claim to include breach of the alleged underlying sale of goods contract.

9. The question of whether a defendant can introduce extraneous matters such as an underlying agreement, especially an agreement on conditions attached to the delivery of a bill of exchange, as a triable defence to resist summary judgment on dishonoured cheque has been argued over and over again before the courts. In a recent case, Lee Man Ching Mandy trading as Blossom Industrial Company v. Chiu Hing, DCCJ 16461 of 2000, I was called upon to decide this question. I shall not rehearse my judgment in that case in full. I append below the concluding part of my reasons therein:-

"8. It is quite clear that there are two distinct lines of authorities, with roots going back in time and to English courts, for diametrically opposite treatment of the issue. In the circumstances, I consider myself at liberty to consider the issue afresh.

9. In my view, the reasoning of Trainor J quoted above is to be preferred. I accept that a bill of exchange is vested with special properties recognized by law so that no oral or other evidence may be admitted to contradict the terms on the face of it. However, a bill of exchange is complete only when it has been validly delivered. Delivery is a requisite act independent of the written terms. Evidence, written or oral, relating to the quality or validity of the act of delivery is not evidence going to the terms of a written contract and as such cannot possibly contravene the Parole Evidence Rule.

10. More important, section 21(2) of the Bills of Exchange Ordinance Cap. 19 says quite clearly that delivery "may be shown to have been conditional or for a special purpose only, and not for the purpose of transferring the property in the bill." In as much as section 21(3) says that unconditional delivery is presumed, by the same token the presumption can be rebutted by evidence. In view of such express statutory provisions, I cannot see how I or any court can deny the Defendant in this case the opportunity to adduce evidence as to the quality or validity of delivery of the cheques under consideration.

11. Accordingly, the Order 14 summons is dismissed. Since the Defendant is unrepresented, I make no order as to costs on this application."

The Plaintiff in that case did appeal against my decision. The Court of Appeal, in CACV 515 of 2001, dismissed the appeal. It can be safely taken that there is one more authority fallen from the august appellate forum in favour of giving opportunity to a defendant in an appropriate case to adduce evidence as to alleged conditional delivery of a dishonoured cheque.

10. Having given more thought to the issue, I think I can usefully add two more observations to the reasons stated in my judgment in Lee Man Ching v. Chiu Hing.

11. First, Plaintiffs suing on dishonoured cheques often misapplied the Parole Evidence Rule. The Parole Evidence Rule of course prohibits (subject to certain exceptions) introduction of evidence to contradict the terms of a written contract. Written contract is one of the operative criteria for invoking the Parole Evidence Rule. A cheque per se is not a written contract. The nature of a cheque is defined by statute as "an unconditional demand......." No amount of judicial dicta can vary this statutory definition. A simple illustration can re-inforce this point. It is trite law that a cheque cannot be relied upon as a contract for loan of money. Once this point is accepted, any argument that a cheque may be taken as a contract for payment falls by the way side. At best, a cheque can be relied upon as evidence of certain terms (especially terms as to payment) in a contract. Thus, where the only cause of action pleaded is a dishonoured cheque, the cheque per se being not a contract, it does not assist the Plaintiff to pray in aid the Parol Evidence Rule. If the Plaintiff then goes on to rely on an underlying contract of which the cheque furnishes evidence of some of its terms, unless the entire contract is in writing, obviously the Defendant is entitled to dispute the substance and terms of the contract. So where the contract is at least in part an oral one and also supported by a cheque, it is often open to the Defendant to adduce evidence to contest the terms of the contract. Typically, as in this and many other cases, the Defendant may introduce evidence as to conditional delivery of the cheque. Section 21 of the Bills of Exchange Ordinance, Cap. 19 clearly envisages and admits such defence.

12. Second. The magic of a cheque (or bill of exchange) as the equivalent of indebitable monetary currency is often exaggerated. If one reads the Bills of Exchange Ordinance, Cap. 19 from the beginning to the end very carefully, it is not difficult to see that the magical effect of a cheque works only after the cheque has lawfully come to the possession of a holder in due course. A holder in due course has an invincible case for summary judgment on dishonoured cheque. A holder who is not a holder in due course can be affected by a number of equities. Again, referring back to Section 21 of the Bills of Exchange Ordinance, Cap. 19, clearly "as between the (immediate) parties", a cheque carries little magical effect in terms of guaranteed payment. It is always open to a drawer to assert that he delivered the cheque to the Plaintiff with conditions attached; whether the assertion would be believed or not is another matter which has to be resolved by trial.

14. It is not difficult to find dicta from distinguished judges that apparently contradict observations made in the preceding paragraphs herein. It will require a lengthy dissertation to show that some of those judges have been misunderstood. For those learned judges who are firmly in favour of summary judgment for dishonoured cheques, I cannot counter the weight of their authority but I can shelter behind equally formidable authorities to the contrary. I suggest, with all respects, some authorities mistook an unconditional demand to a bank as being at the same time an unconditional promise to a person taking delivery of a cheque.

15. In the premises, I allowed the appeal with costs. The thought of requiring the Defendant to put money in court as security was aired during the hearing. However, since the parties could not agree on the amount to be furnished, I had to consider what authority the court had to order security. In this case, the Defendant had already filed a Defence. There was no question of leave to defend and thus no basis for the court to order security as a condition for defence. Hence the Defendant has unrestricted right to defend.